Good day, welcome to the Barratt Developments half year ended 31st of December 2022 trading update call. Please note this call is being recorded, for the duration of the call, your lines will be listen only. However, you will have the opportunity to ask questions, this can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero you'll be connected to an operator. I will now hand you over to David Thomas, CEO. Please go ahead.
Thank you, and good morning, everyone. Happy new year to you all, and thank you for joining us. Steven and Mike are both with me this morning. Just to start, in terms of our operational performance, I think you can see that it's been very strong. We've delivered both our new reservations and also our opening forward order book from the start of FY23. This is clearly through the amazing efforts of our site teams, our subcontractors, and our supply chain partners against what's been a very challenging backdrop. This has helped us to deliver a near 7% increase in total home completions at 8,626.
The political and economic uncertainty in the first quarter of our financial year was poorly compounded by the rapid and material changes in mortgage rates as we moved into the second quarter, which impacted both affordability and consumer confidence. The net result was a material decline of 44% in our private reservation rate to 0.44 across the half year. We have detailed a further breakdown in the appendices for the reservation rate during the six months. Our reservation rate also reflected limited availability of homes for early occupation, given the size and the duration to build out our forward order book, as well as the conclusion of Help to Buy at the end of October.
Against the sharply lower reservation backdrop, we have continued to see house price inflation, with pricing and reservations taken in the period continuing to register year-on-year improvements, notwithstanding an increased use of sales incentives, particularly in the second quarter. Our average sales outlets in the half year at 360 were 6.8% ahead of the 337 in the first half of FY22. The increase in average outlets has reflected both a solid pipeline of new site openings with 52 openings in the half, as well as the lower private reservation rate, which has naturally extended the average life of our outlets.
Our total order book at 31st of December consisted of 10,511 homes, 29% below the order book at the same point last year and 33% below in value terms at GBP 2.5 billion. Our robust pricing experience to date, though, is clear in the private order book. The private average selling price in our order book at GBP 374,000 is 5.6% ahead of the GBP 354,000 reported at this point last year. It remains in line with that reported at the 28th of August 2022 at the time of our full year results announcement. Our site teams and subcontractors continued to improve our build output during the first quarter. Reflecting the lower reservation environment in the second quarter, our site teams began to adjust production levels.
As a result, our construction output for the half was 333 equivalent homes per week, just over 2% below the 341 equivalent homes built in the first half in the prior year. Our drive for industry-leading build quality remains. Our site teams have delivered our construction output without compromising customer service or build quality. I'm pleased to report that we continue to lead the industry on build quality based on the latest NHBC Reportable Items benchmark for calendar 2022. Turning now to the land market. We have been increasingly selective in the land opportunities on which we have been prepared to bid, and we continue to apply our minimum 23% gross margin hurdle and 25% Return on Capital Employed. Reflecting the changed market backdrop, we've actually seen negative land approvals in the half year.
On a gross basis, we approved 16 sites for just over 3,000 plots. We saw 22 sites for nearly 3,300 plots removed as they were no longer proceeding. The result was a 290 plot and six site reduction in our land approvals. With the existing strength of our land bank and the uncertainty in the sales market, we continue to expect that land approvals will be substantially below replacement levels in FY23. Our balance sheet remains very strong, with net cash at around GBP 965 million after payment of both the final dividend of GBP 260 million and the share buyback, where we have purchased around GBP 100 million of shares in the first half.
I'm also pleased to report that we extended our GBP 700 million revolving credit facility by a further two years to November 2027. Within this, we introduced sustainability-linked performance measures. Finally, before turning to the outlook, I wanted to highlight our recent success with the CDP Sustainability Index, where we have been recognized in the Climate Change A-list for leadership. This places Barratt in a group of just 283 companies globally and is a first for a UK house builder. Turning now to outlook. Clearly, outlook for the 2nd half carries significant uncertainties, with consumer confidence and the availability and pricing of mortgages critical to the health of the housing market. On the positive, we have seen more mortgage availability at higher loan to values and some reductions in mortgage rates since Christmas.
Our full year outcome will depend on how the market evolves in the early months of 2023. Assuming net reservations increase in line with the normal spring trading patterns to around 0.5 homes per active outlet per week, we will remain on track to deliver current consensus total home completions of around 17,500. Should the usual seasonal improvement not occur and trading remain at levels we've recently experienced, then we would anticipate total home completions for FY 2023 will be in a range of 16,000-16,500.
Not withstanding these uncertainties, with our strong financial position and substantial net cash balances, we remain committed to both the GBP 200 million share buyback program, which will resume following the end of our close period after our interim results announcement in February, and also to our ordinary dividend with the stated policy on ordinary dividend cover for FY23 at 2x . As you would expect, given the level of experience at Barratt, we have a clear strategy for operating the business in these uncertain times. We monitor the market closely on a week-to-week basis, we can continue to respond promptly and effectively to any changes that we see. Thank you. I'll now hand over to the operator to open up for questions.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question from the queue, it's star two. Again, please press star one to ask a question. We will take the first question from Chris Millington from Numis. Please go ahead.
Morning, gents. Happy New Year to you all. Just got a few as usual, please. The first one's just on that sales rate point of 0.5 you mentioned about spring. I'm just wondering when last did you do a sales rate similar to that sort of level? That's the first one. Second one's just about the incentive schemes you've been rolling out. Perhaps you could just give us a feel as to kind of how you're targeting that. Has it driven any footfall? Just kind of what the customer reaction's been. Then just a quick one on the outlook for build cost inflation with obviously some quite big moves in commodity prices, and I presume labor's getting a bit easier. Just like your impression on that as well, please.
Chris, hi. Chris, good morning. You know, Happy New Year again to you. Just in terms of sales rates and the incentive schemes, if I pick up those two and also Steven and Michael might want to just discuss in terms of build cost and our experience there, both in terms of labor and materials. Yeah, look, in terms of sales rates, Chris, I understand, you know, you've got to go back some time to see sales rates at a level of 0.5. If you look at our experience 2009 through to 2013, really the period post the financial crisis, prior to the launch of Help to Buy, we saw sales rates on average run at about 0.5.
Some years were a little lower, some years a little higher, but across that five-year period, that was the kind of sales level. I think we're very clear in the statement this morning that we do see that there's a range of outcomes and our, and our most recent sales experience has been at 0.3.
Mm-hmm. Mm-hmm.
In terms of the incentive schemes, our incentive schemes are, you know, broadly focusing on an offer for consumers where we're contributing towards mortgage costs or contributing towards cost of living. Those are providing offers in the range of 4%-5% in terms of the reduction against the headline price. We've got, you know, a key offer out there in terms of key workers, so focused on NHS and other key workers. It's a scheme that we've run historically and was very successful when we ran it previously. I would have to say that when you look at the sales rate at 0.3, that the take up to date has not been strong.
The reality is we've got to see how that evolves as we move into the first quarter of FY23. Hence why we've outlined, look, if we carry on at 0.3, this is where we're gonna be. If we step up to 0.5, this is where we're gonna be.
Right, yeah. Footfall as well, David, just on that. Has it driven any more footfall? I appreciate the point on reservations.
Yeah. I would say that overall, I mean, footfall levels have been good. I mean, if you're benchmarking footfall, we've tended to use the two bases of, one, the prior year, and secondly, against 2019. I would say that when you look at it against the 2019 benchmark, footfall has been good. It's clearly been down on the prior year. The challenge is very much one of conversion.
Okay.
It's about, you know, people having the confidence to actually sign up for that home purchase. That's been particularly emphasized in terms of first-time buyers. We'd say that the, you know, the buyers that have really gone from the market have been the first-time buyers who have been most concerned about the changes in mortgage rate. Perhaps, you know, just haven't seen these types of mortgage rates historically, which more second-time buyers may have had experience of higher rates, similar to rates that we saw back in 2005, 2006, 2007.
Mm-hmm. Mm-hmm. Mm-hmm.
Okay. If I pass all to Steven and Mike.
Yeah.
Thanks, Chris.
Good morning, Chris. Happy New Year.
Happy New Year.
In terms of build cost increases, starting with materials, yeah, we still see an inflationary pressures on many commodities, although the pace and scale of those increases have started to reduce. The vast majority of our materials, about 85% of them are fixed until June. The other deals are at review yet. In terms of pricing, what we were seeing previously was that a lot of the deals were being rolled forward on a month by month basis. We're now seeing greater price stability, with some of our suppliers offering 6-12 months fixed prices clearly. Energy costs still being a sort of factor, although a lot of the suppliers are indicating that hasn't been the issue that they expected it to be.
Some of the commodities with high pressure content are starting to come back a little bit now. We are starting to see some price deflation on raw materials. In particular, I think I've mentioned in previous calls that we've seen timber coming back, and I think now we've had six consecutive months of timber price reductions. Timber's now back to sort of 2020 pre-pandemic levels. As I said, bricks, steel and plastics, which were previously a source of high inflation are now stabilized. You know, clearly we've got good relationships with our supply chain. We're in regular contact with them and monitoring the situation. In terms of labor, again, similar situation.
We had a lot of pressure previously on groundworkers and bricklaying trades, but we've seen them starting to sort of come back and reflect that trades and subcontractors are now trying to secure workload out into the future.
The only thing I'd add to that, Chris, good morning, is that, given how far bought we are for the year, we're not really changing our view of build cost inflation for the full year. I still expect that to be sort of 9%-10% for the full year, as we previously guided.
Sorry about that. That's all very clear. Thanks for your answers.
The next question comes from Aynsley Lammin from Investec.
Hi. Morning. Happy New Year, everybody. Just two from me, please. Wondered if you'd just give a bit more color on the mortgage market. I mean, in terms of kind of, you know, are you seeing the bigger lenders actually cut rates and by how much if they are, as we go into the spring selling season? Maybe just a bit more color around their kind of appetite to lend and how that kind of, you know, qualification for affordability is stacking up now compared to maybe where it was in October, November of last year. Secondly, just wondered if there are any kind of regional, or price point differences you're seeing, or is it kind of pretty much across the board in terms of those sales rate trends?
Aynsley, hi. Good morning, and happy New Year again. Yeah, if I just pick up in terms of regional and cover that, and then Mike can talk to you in terms of the mortgage market. You know, all I would say on the mortgage market is that there's been a number of announcements since the first of January in terms of rate improvements. You know, clearly that's gotta be a positive start in terms of 2023. Mike will cover that. In terms of regional variations, no, there's nothing I would really call out. The reality is that relative to where we were three months ago, relative to where we were six months ago, all the markets have seen significant reductions in the reservation rates.
As you can see in our update, the way that the reservation rates have evolved, we've provided a, you know, a three-segment breakdown in terms of the reservation rate. I think that's been pretty universal. The only thing I would call out, just, you know, to give a little bit of color, is to say that Scotland never had the transition from Help to Buy that England and Wales were having because Scotland never had the Help to Buy experience. While Scotland have had all the other challenges that England and Wales have faced, they haven't faced the Help to Buy transition. Net for Scotland, it's probably been a less difficult six-month period.
Secondly, again, a very small part in overall terms of our business, but worth mentioning that the Welsh Government have announced a 2-year extension of Help to Buy. Wales had Help to Buy. The Help to Buy program was going to expire in line with England, but the Welsh Government announced before Christmas that they were going to extend that for a 2-year period. You know, that probably puts Scotland and Wales in a slightly different position to England. Mike?
Morning, Aynsley. On mortgages, I think the market's still quite competitive. I mean, we saw, you know, Halifax and Skipton have come back in with 95% loan-to-value products over the last few months. We are seeing the sort of spreads reducing and rates coming down accordingly. We look at a sort of benchmark 85% LTV, and they're now available below 5%, which is, you know, 100 bps or more down on where they were a few months ago. I think, you know, there is good competition there. Clearly the lending appetite still seems to be there from lenders. The other way that's manifesting itself for us is just when we look at sort of down valuations and pressure from the surveyors.
You know, we're not seeing abnormally high levels of down valuations either. I think the lending appetite and the broader credit environment is, you know, is in a good place.
Right. Very helpful. Thank you.
Thanks, Aynsley.
The next question comes from Will Jones from Barclays. Please go ahead.
Hello. Is it Will Jones from Redburn? Sorry.
Welcome to the party.
I beg your pardon.
I wonder where you deployed me this morning. Morning, guys. Yeah, three if I could please. First was just around, I guess all things price. Just to confirm, it seems like you haven't had any change to gross prices in the kind of calendar fourth quarter. Really just thinking ahead, what are the tactics from here forward, and what would be the trigger for that starting to change, do you think? The second was just around land and the reference to canceled deals in the six months. Are they exited with relatively, is there any penalties there? How should we think about cash land spend and therefore net cash for the group across the rest of the year?
Just tying up on the scenarios you've given, the 0.5, would that be a 6-month rate of 0.5 or just a spring rate of 0.5? Again, just with order book in mind, is there a minimum level you would like the order book to be at on the private units come June? Thanks.
Okay. Will, good morning. Yeah, if I'll just sort of work my way through those, Mike will pick up in terms of the sales rate and what we're expecting in terms of sales rate at, you know, is 0.5 spring only or is it for the whole of the second half? I mean, I think you can see, I'll just say at headline level, you can see in terms of the reservation rate, and the effect on total completions, i.e., whether we're at 0.3 or 0.5, there isn't a huge difference, which is also reflective of the fact that we are very substantially forward sold. Mike will talk more through that.
In terms of pricing, well, I think the way that the pricing is evolving is that we were running as a business with incentives that would have been somewhere in the order of 2%-3%. That was probably a typical incentive level running through FY21 or FY22, maybe at the low end of that range. Incentives are expanding and will expand, and I think reasonably incentives can expand up to 5%-6%. Because of the cessation of Help to Buy, you couldn't combine Help to Buy with part exchange. We will definitely see more part exchange business, and part exchange tends to be a relatively expensive incentive, perhaps running at that, you know, 6% sort of level.
Beyond that level of 5%-6%, everyone then needs to look to headline price, I think for 2 reasons. One, because the way the mortgage market operates, there's only certain levels of incentive that are acceptable to the banks and the mortgage providers. Secondly, because I think for the consumer, if you're saying, you know, I just exaggerate for a fact, the headline price is 100, but you can buy it for 80, there then becomes just a lack of credibility about the headline prices. I would say adjustments to headline prices in the final quarter of 2022 have been very limited. I would expect that there will be more adjustment to headline prices as we move through the first half of 2023.
As we've touched on, in the recent on the call, clearly a rate of sale of 0.3 is not where the industry wants to be sitting, and therefore one would assume that price will be part of that mechanism. In terms of, just on land, no, we've not incurred any penalties, and it wouldn't really be our intention to get into that situation. These are deals where we either were not contracted or we were contracted in a way that it wasn't, you know, it wasn't a binding contractual position. I think also just to expand on the land approvals and... Although, you know, I think we would all accept with hindsight that the challenges in July and August were relatively limited.
We did feel that in July and August there were some challenges around the market, we were still in the land market and approving land. Therefore, when you look at the approval levels of 16, the bulk of those approvals would've sat in the first quarter of the half year with clearly a very limited number of approvals in the second quarter. Equally, the cancellations would predominantly sit in the second quarter. Therefore, as we move into land for our Q3 and our Q4, then, you know, I would expect at this point in time that those numbers will be very, very muted, because really, we don't see anything compelling to draw us back into the land market at this point in time.
If I pass over to Mike just on the rate of sale.
Yeah, morning. Well, just finishing off on the land point on net spend. I would just separate the approvals picture from the cash spend. We're still expecting to spend about GBP 900 million on land in this year, which largely comes from land creditor commitments that we had coming into the year, and then approvals from last year that are feeding through still. In our net cash guidance, I think we've said previously GBP 800 million net cash expected for the end of the year. I think it's, you know, slightly could be a touch ahead of that. If you sort of thought of that as GBP 800 million-GBP 900 million now, that, you know, that's probably reasonable at this stage.
Then just on the selling rate. The 0.5 to deliver the consensus number essentially is a sustained rate through the 3rd quarter into the early part of the 4th quarter. Clearly, we need to leave ourselves a bit of time between reservation and getting the customer through the conveyancing process and, you know, into the property. It's not assuming that it goes right to the end of the year, but that 0.5 would need to be sustained into Q4. Then clearly in the last couple of months, we'd be building the order book for next year. That's sort of how we've got to those numbers.
Great. Thank you. Okay. Thank you.
The next question comes from Emily Bédel, from Barclays.
Morning, guys, I hope you're all well. I've got three questions, please. Firstly, on down valuations, are you seeing any sort of uptick on those yet? I think at Q1 you were talking about them sort of running at 1 in 25 or 1 in 30 versus I think you said sort of one in five in bad times. Are we seeing a move on that yet? Secondly, on those lead indicators, are you seeing any sort of change in the quality of sort of customers or leads or sort of anything that looks sort of particularly different? Or conversely, are you building up sort of quite a big bank of potential interest that just hasn't been able or sort of, kind of willing to convert to actual sales?
Thirdly, obviously there's no PBT guidance in here, or there's no sort of PBT flex where you've given us that flex on completions. Should we just think about that as sort of dropping through at the normal sort of 32% contribution margin as a sort of starting point? Presumably there's not much that you can do on cost in the short term, but as we if we assume that sort of actually plays out, sort of how do you start looking at the cost base into next year? Thanks, guys.
Okay. Emily, first of all, good morning and Happy New Year. Mike will pick up in terms of the down valuations, and if I just talk initially about customers and what we're seeing in terms of trends, and maybe just a little bit of our thoughts in terms of actions that we can take and so on, and then Mike will pick up in terms of PBT and costs and so on. I think first of all, as we've sort of touched on, Emily, and I think it's set out in the statement, and in the appendixes, we've had a, you know, some period where we've traded at 0.3. Whilst we recognize that 0.3 is clearly a very challenging rate of sale. There has been some stability around that.
Prior to that, we've clearly seen rates of sale drop dramatically. We're seeing that as being a small positive that we haven't continued to see that rate of sale fall away. It isn't entirely the cause of, but I think it is largely related to the exit of the first-time buyer from the market. Partly that's because of mortgage availability and mortgage pricing. I mean, typically, the first-time buyer wants higher loan-to-value and attractive pricing. I think it's also because of all the kind of scare stories that there's been in terms of, should people be buying houses, house prices are gonna fall 20%, 25%. None of these things are things that first-time buyers want to hear, and therefore that's been a big factor.
In terms of consumer interest in the market, and you can look at the announcement from Rightmove in terms of Boxing Day activity, you know, all-time record levels of Boxing Day activity. I don't think the consumer appetite to buy a home is in any way diminished. If you look at the surveys in terms of people's desire to own a home, that is undiminished. Clearly, they're being slightly thwarted in terms of the present economic or financial backdrop. The quality of leads we would see as being pretty good. You know, I don't think we're getting people turning up in our sales offices who don't have an appetite to buy, but it's just getting them through that process and through the conversion process.
You know, I understand that December is just a month and January is a month, but I think the reality is people get a bit of time to reflect over Christmas. We're very hopeful that as we move through January and February, that we will see improved levels of activity. As you know, we're back to the market again in early February with half year results. We'll have January trading at that point in time, and we'll also be able to report on the extent to which we're seeing better conversion through January. Mike?
Just picking up on down valuations anyway. I think it's important to remember the backdrop there. You know, if you look out over the past year, is that down valuations have been running at historically very low levels, you know, below sort of 3%, which is unusually low. I think we've seen a little bit of normalization over the past few months. You know, picking up to the sort of 4% to slightly more than 4% of reservations. I mean, you know, in context that is pretty normal. We're not seeing anything that's worrying us from that point of view at the moment. Just on PBT, you know, it's only a trading statement, so we're not really talking about profit margins today.
I think, you know, as you say, as a rule of thumb, if you look at the contribution margin that we've talked about, I think 32% is a reasonable rule of thumb number. Then you can flex that through the P&L on the volume number that you know, that you choose. And as you say, you know, the cost base is relatively fixed over the next six months. You know, there's not much we're able to do to change that over the next six months. I think that's a reasonable way of looking at it.
I think, Emily, just to add in terms of cost that, you know, We're also very clear about the steps that the business took back in 2008. We did implement certain steps around the time of the referendum and again around the time of COVID. The reality is that, you know, we're already enacting that in terms of what we've seen since September. I think the real big step for the business is whether we, you know, whether we're in or out of the land market, and I think we've clearly demonstrated during the first half that we've been very much out of the land market. As we touched on in the statement, we've said that, you know, we've frozen any recruitment into the business.
I think we're very aware of the levers that we can pull. I think it's right that we should see how the market is settling, and it has been such a volatile market since September. As I touched on a moment ago, you know, I think we feel that we're now starting to see some stability. We've hopefully hit the floor, and therefore it's a question of what do we see building through the first quarter in terms of reservation trends, and then we can start looking at further measures that may be required.
Great. Thanks, guys.
Thank you.
The next question comes from Clyde Lewis from Peel Hunt.
Good morning, all. Happy New Year as well. I think I've just got a couple left, I think now. David, it'd be interesting to hear about what's happening, I suppose, in terms of the housing associations and their demand for affordable housing and whether they've backed off at all in the market. Also, whether you're seeing sort of any bulk buyer interest sort of started to creep back in and people knocking on your door and trying to buy, you know, lumps off you at cheaper prices. The second one was, I suppose, around the cancellation rates, and clearly it's a net figure in terms of that reservation number. How has that sort of gross versus net number sort of evolved?
Have cancellation rates stabilized a little bit in the last couple of months, or are they still at fairly elevated levels?
Clyde, thank you. Well, I'm just gonna try to walk through those and then Mike may have to rescue me on cancellation rates. In terms of HAs, I mean, I, I think the HAs in overall terms for the HA sector, you know, they have got quite a few challenges, you know. Around the level of rent settlement that they've been able to achieve. I think they've been capped at 7%, and they've clearly got some rapidly rising costs as all businesses have got. I would say, as a generalization, that the HA's appetite for private development is diminished, and therefore their activity in the land market, I would say, along with most housebuilders, has diminished. In terms of their one oh six requirements, I think it's quite a mixed picture.
I think we are seeing some of the HAs who are concerned about the intake of more 106 and the pricing on that. I would say for us overall, that hasn't been a significant factor. You know, we've had some HAs who've not wanted to proceed, but then we've always found another HA who does want to proceed. It hasn't become a significant issue for the market at all. In terms of bulk buyer interest, again, I think it's a good point in that a very different backdrop to 2008. For two main reasons, I think. One, the house builders are not as such just running for cash, and I think that was a driver in a way was that discount levels were quite quickly very high.
Product being discounted by 10%, 15%, 20%, was not unusual. Apartments potentially being discounted at even higher amounts, which brought in the bulk buyers. The second point being that I think the whole domain of the private landlord is a very, very different backdrop. People coming in to buy bulk portfolios, I think has been much less a feature of the market over the last 5+ years as we've seen these tax changes being enacted for the private landlord. On cancellation rates, and I'll pass over to Mike, is I mean, as you said, it is a net figure. I'm always quite keen not to get too drawn into it.
I would say in absolute terms, the levels of cancellations on a year-on-year basis are up by, you know, maybe 200 and something units on a year-on-year basis. It's not, it's not a significant difference on an absolute basis. Mike, do you want to expand on that?
No, I think that's right. I mean, it's the other sort of data point on it is if you look at the sort of cancellation rate per outlet a week, it's actually flat year-on-year. If you just look at it week-to-week as gross reservations have come down, the sort of cancellation rate in a week has obviously increased, but that's just in the maths. I don't think we're seeing anything, you know, that you wouldn't expect.
As I say, if you step back from it, the level of cancellation activity, if you like, is actually pretty flat year-on-year. Obviously in the math, the rate increases because gross reservations have come down.
Okay, perfect. Thank you.
Thanks. Thanks, Clyde.
We will now take the next question from Ami Galla from Citigroup. Please go ahead.
Yeah, hi. Happy New Year, guys. Just two questions from me. The first one was just on the first time buyers. I mean, I was wondering if you could give us some color, the sort of price adjustment that is needed to bring those first time buyers back into the market. In that context, when kind of consider that sort of 0.5 sales rate for spring, are we looking at more the sentiment on the market improving rather than the whole affordability concerns actually getting better? The second one was just on in the short term on costs. Are there any moving parts at all? I mean, as build rates come down because the pressure is less in terms of building faster, is there some short-term cost benefits that you can see as an offset?
Ami Galla, hi. Hi, good morning. If I, if I pick up in terms of first time buyers and Sean can maybe talk about costs. I think we maybe touched on it earlier on costs, but the reality is there's probably relatively little short-term benefit. Anyway, just on first time buyers. I think, you know, a couple of points. For the first time buyer, the availability of higher loan-to-values is quite fundamental. Being able to access mortgages at 90% or 95% loan to value, particularly absent parental assistance. Parental assistance is a biggish part of the first time buyer market, but it's not the majority of the first time buyer market by any stretch. Therefore, it isn't, in my view, so much about the headline price.
It's about the first time buyer's ability to have the deposit plus the related costs, stamp duty and so on, in terms of moving, i.e. the transaction costs. I think when you look at the arithmetic around that, the reality is that if they need to access a 95% loan to value. A 90% loan to value is all that they can access or all that they can afford. It's very, very unlikely that they're just going to be able to produce the additional 5% deposit, and therefore they're out of the market absent the 95% loan to value, or likewise, absent the 90% loan to value.
I think what we'll see is we'll see a pickup in incentive levels, and as I touched on earlier, we may start to see some reduction in terms of headline pricing, but that in itself is not going to bring the first-time buyer back into the market. I think the increased availability and as we've seen since Christmas, the reductions in pricing from the lenders will be absolutely key. Clearly, for the mortgage lenders, they are looking at it thinking, "Okay, our mortgage lending is dropping rapidly, so we need to do everything that we can do to improve that." One of the things that the mortgage lenders can do is tighten the spreads and make the offer more attractive to the consumer. Steven?
Yeah. Good morning. I think, I think you also mentioned around about construction activity and savings and costs. In terms of construction activity, that has moderated in the second half. You can see from our statement that we've reduced an average of about 333 equivalent homes per week, compared to 341 in the previous period. Clearly, the focus has been on how far along the book and the focus on reserves and exchanged units. We work to strict parameters in terms of any units in progress. I guess, you know, there's no real sort of cost savings coming through at the moment. I did mention earlier that we're starting to see some softening around the labor rates because there is less production going forward, but generally, there's nothing significant to flag, really.
Thank you.
Thank you.
We will now take the next question from Gregor Kuglitsch from UBS.
Hi. Good morning. A few questions, please. Maybe, if we could just touch quickly on the site count. I mean, it's obviously ticking up because of new sites and the slower burn rate. I guess the question is, will that continue or is it sort of gonna stabilize out now? I'm guessing you're not pushing site starts, particularly at this stage. That was the first question. The second question is, I mean, I guess the answer is obvious because you haven't bought any land. Given, you know, incentives are going up, pricing is obviously starting to drift and sales are slow, is there sort of a price adjustment that you are seeing in the land market?
Is it just sort of gone totally illiquid at this stage, and it just takes time? Then maybe a final question. I mean, at this stage, maybe it's early to judge, but I'm guessing you've done more work, and you've commented on this before, I think. The sort of potential for land impairments given sort of current trading conditions, is there any? Do you think it's just sort of not material enough yet to really do anything? Thank you.
Okay. Gregor, I think in terms of site count, I'll pass that over to Mike. Also in terms of land impairment, I think on land impairment, I'd just make the comment that we're clearly not seeing adjustments in relation to headline price at this point in time that would really get you into impairment. Look, I think the land market, the reality is it's the relationship between buyers and sellers, and, you know, whatever you're buying and selling, if there's some sort of market event, I think the reality is it takes time for the buyers and sellers to get realigned. We saw this during the financial crisis.
You know, my view is it's an absolute minimum, six months, 6-9 months for you to get that kind of alignment. People have got to see that prices have either stabilized or there has been a reduction in pricing. As you know, we're feeding in revenue and costs as everyone else is to the land viabilities. I think there's a huge amount of uncertainty just now regarding where our revenue is going to end up and where our cost is going to end up. I think for us, it's probably more about the difficulty in terms of making those assumptions. It's probably never a certain science, but there's a big level of uncertainty about both sides of that equation. We feel that we shouldn't really be undertaking those calculations presently. We've got plenty of land anyway.
Inevitably, if you look at our land purchasing numbers less than zero, and you'll see other house builders' numbers over the next month or so, then my sense would be that is gonna feed directly into a reduction in prices. Broadly, if nobody's buying land will have to come down in price to bring people back into the market. Mike, do you want to pick up in terms of site count and land impairments?
Yeah, sure. I mean, as you say, Gregor, we've opened sites in the first half. We opened 52 new outlets, during the course of the first half, and ended at 378. We are still opening sites. You know, as we look to drive revenue, there may be opportunities for us to open, you know, dual-branded sites and so on. We'll still.
Bring those through the pipeline. What we are doing is being sort of very careful about the sites that we're opening, and we put a sort of gateway in place before we open a site to make sure that they return sort of a positive cash contribution over a 2-year period. You know, we're being sort of mindful about that. I do think we will see further outlet openings in the second half. Just moving on to the, to the point on impairments, I think David's point really at the beginning is right. We're not seeing headline pricing movements, and therefore, at this stage, you know, I wouldn't expect to see meaningful impairments coming through. We obviously keep that under review regularly.
As we said previously, you know, there is because of the discipline and the sites that we bought over the past few years, and the margins that we've been achieving, there is a level of headroom in the site portfolio before we would start to see meaningful levels of impairment come through.
Thank you.
Thanks.
We will now take the next question from Glynis Johnson from Jefferies.
Morning, everyone. Two, if I may, and they're, well, one's big picture. We talked about construction slowing and asked the questions on it, but I just really wanted to push you a bit more in terms of the build work in progress because your guidance in terms of cash, you referenced relative to your land spend. If your selling rate is substantially lower going into you know, particularly the second half of your 2023, but also we can argue second half calendar 2023, could we see a very substantial reduction in terms of the build WIP on the balance sheet? Could cash actually have a bigger element of benefit because of that? Then the second one is, you know, really government. What kind of interactions have you had with government?
You say you're having constructive discussions in terms of the builders pledge. Where are we in terms of the long view? Also more importantly, you know, has government shown any reaction in terms of the very different trading environment that you're now sitting in relative to where, you know, life was a year ago? Are we, is there any mood music in terms of son or daughter of Help to Buy potentially coming back?
Glynis, hi. Hi, good morning. If I just touch briefly on work in progress, and I'll pass that across to Mike. Look, I would just say that one of the factors of work in progress, Glynis, if you look at, for example, June 2022 or December 2021, the reality is that for ourselves, and I would say for the industry, we had very, very little completed stock on the balance sheet. That's clearly been a factor of selling at 0.7, 0.8, whatever people's rates of sale are, and just simply not being able to build the normal levels of completed stock. I think that's one factor that will result in us having more work in progress on the balance sheet.
As you say, there's other factors that will result in less work in progress, and Mike can talk more to that. In terms of government discussions, I think that it's very obvious, Glynis Johnson, that it's been a very challenging 6 months in terms of political engagement. I know that, you know, we have Michael Gove back as Secretary of State, there's, you know, we now have some continuity, clearly, that was interrupted over a period of time. And likewise with the Housing Minister changing as well. I would say if you look at the period November, December, where the market has been particularly challenging, there has been a higher level of engagement from the Department of Levelling Up and also from Homes England. I think they are very conscious of the realities of the market.
I've certainly met with the Housing Minister. I've met with the Secretary of State, not to talk about cladding, but to talk about the market and to talk about planning. That's, you know, that's all happened in the November, December period. I think they're absolutely engaged, but I would not expect the son or daughter of Help to Buy. You know, I think they are committed to the exit of the Help to Buy program, and therefore, I would see it as being improbable. It's not, you know, the basis that we're planning on. We're planning on the fact that certainly 2023 and 2024, we would be operating without any demand-side support. That, as you know, Glynis, was a challenge for us.
I think we were, we were navigating our way through that, in my view, well, as an industry. We'd seen a big reduction in demand-side support as the second-time buyers left the market in 2021. I think we were proceeding pretty well with the first-time buyers exiting the Help to Buy program in 2022. But I wouldn't expect anything further. The government are definitely engaged. They're fully aware of the position. They're also engaging with the house builders. They're engaging with the banks. I know that, you know, the banks were in to see the chancellor relatively recently. You know, they're fully engaged in relation to that. Okay, Mike, if I pass over to you on WIP.
Yeah, work in progress. I mean, I think you're right, Glynis, to sort of mention that as we slow down construction, there will be, you know, a little bit of an impact on WIP. As David pointed out, there are some things going in the opposite direction around stock and PX and just having sites longer for slightly sort of open for slightly longer. I mean, as I said, I think in answer to Will earlier on, we are edging up our cash guidance for the year.
you know, above 800 to sort of 800-900 range. We'll obviously, you know, keep a very close eye on WIP and control the cash that we're putting to work. you know, that's something that we obviously monitor very closely.
Thank you. The next question comes from Charlie Campbell from Liberum.
Morning, Happy New Year. Just sort of a couple questions from me really. I suppose I just sort of wondered, your 0.5 sort of sales guidance or aspiration, I suppose, for the second half. Is that predicated on a particular mortgage level? Can you do that with mortgage levels where they are now, or do you need them to come down further? The second kind of related question is just whether you're seeing your home buyers adapt to higher mortgage rates, either by extending the term of the mortgage using variable rates a bit more or kind of trading down. Just wonder if it's probably a bit early, but just wondering if you're seeing any of that going on at the moment. Thank you.
Charlie. Hi. Yeah. If I could sort of talk about those. I mean, I don't think it's really about mortgage rates in isolation. I mean, look, improved mortgage rates, which we have seen, as I've touched on already in January, a number of the banks have announced reductions in rates. Improved mortgage rates definitely helps, but I think it's about the overall backdrop, particularly for the first time buyer. What message is the first time buyer getting about cost of living, about the outlook for house prices, about mortgage rates, et cetera? I think that's really the overall backdrop. I think that the supply-demand dynamic is we can get there if we can get the conversion, and we can get the consumer across the line.
There's no question that we've got the footfall, and we've got the level of interest to achieve that rate of sale. It's really about the confidence for the consumer and their ability to convert. It's very early days, but let's see how it progresses during the first quarter in 23. In terms of the approach for the consumer, and this is... You know, the points you outline, I think are important points in terms of the way to look at the consumer because I would say that all of the above is what is happening and has been happening in the market. I mean, affordability has become an extreme challenge since September, affordability was already a challenge pre-September.
Therefore, when you look at the consumer and the purchasing trends, again, if we focus on first time buyers, then clearly extended mortgage terms has become much more of a feature of the market. Mortgages at 30, 35, even mortgages at 40 years, have come into the marketplace. Some way of impacting, and reducing the costs. Then the sort of trading down, downsizing, I think is something that the government were very focused on as part of their withdrawal of Help to Buy.
I think that they felt that perhaps Help to Buy was being used to purchase properties that were bigger than normal requirements, and therefore, just generalizing to illustrate the point, you know, that people were perhaps buying three and four bedroom properties as a first time purchase, whereas they would more normally have bought maybe a two bedroom property or a one bedroom apartment. So the reality is I think that our response to that and the response to Help to Buy coming out of the market, you know, we've said previously that having a broad product range is very important to that. You know, being able to deliver a 1 bedroom apartment or a small house to consumers is very important all the way through to a 5 bedroom home.
I think inevitably with the cost of living challenges and the related affordability challenges, that more of those levers will get pulled. I think when you look at the stats, I would assume that you'll see more longer duration mortgages, for example, and you'll see more of a trend back to first time buyers buying smaller properties would be my sense.
Yeah. Thank you very much. Thank you.
We'll now take the next question from Cédar Ekblom from Morgan Stanley.
Thanks very much. Just one final one from me. On cladding, you have had some of your competitors take some adjustments to potential custom provisions. Have you seen any similar movements in terms of your estimates, particularly as government's scope on some of these required remedies seems to be increasing? Thank you.
Okay. Hi, good morning. If I'm gonna just start on that and then I'll pass over to Mike in terms of the cost. I mean, just to say cladding, I mean, I think that everyone is probably aware, but just to sort of confirm the position that we signed up to the pledge in April last year. We've said a number of times that we don't see that it's right that leaseholders should pay, and we've previously demonstrated that we would step in on a voluntary basis on a number of our buildings. In signing the pledge, we were saying that, you know, we essentially had a commitment that we wanted to sign up to the legal agreement. There's been a process of discussion regarding the legal agreement that has been ongoing since June last year.
We think we're getting close to the Government publishing the legal agreement and we would expect in due course that we would sign up to that legal agreement. Mike, do you want to pick up on costs?
Yeah, just on the costs. When we signed the pledge, we went through a very thorough exercise on the buildings that we've got in the portfolio. And, you know, we obviously made a provision for our best view of the costs of remediating those buildings. I don't think the pledge of the legal agreement itself will change our view of the cost of remediating those buildings. I'm not expecting the provision to move when we sign the agreement. And as we've said previously, you know, the provision is something that we'll keep under review as we get more experience of that remediation. To date, I think we've remediated nine buildings out of the portfolio of over 320. You know, our experience of actually doing it is relatively limited.
We'll keep that under review as we go forward. You know, I wouldn't expect that provision to move, absent some different experience on the ground in terms of actually, you know, delivering the remediation.
Great. Thank you so much.
Thank you.
We will take the next question from John Fraser-Andrews from HSBC.
Thank you. Good morning, gents. Two, if I may, please. The first is, in January trading to date, I realize it's very early days, but have there been any changes in the sales rate of the fourth quarter? Has your pricing or your discounting has that widened since the year-end? That's the first one. The second, perhaps I can press Steven a little harder about this softening in labor rates. Are these actual nominal declines yet in labor rates you're seeing in some of the early trades and on materials?
Has the fall in energy prices, is that indicating that prices will actually fall, you know, over and above some of the sort of more commodity items like timber and steel? Thank you.
Okay. Thanks. Morning. Look, in terms of January trading, I mean, we're, you know, we're not gonna get drawn into that. I mean, the reality is, it is early in January, and we're gonna be back in February, and we'll give the full trading update on that. The only thing I would comment on, as you touched on incentives, we could say that directionally, incentives are increasing. That has been the case since September. As, you know, I touched on earlier, I would expect incentives to continue to increase because there is still scope for incentives to increase further before people need to reach to adjustments in headline pricing.
Regardless of how January and February unfold in terms of trading, I would expect that incentives for the quarter will be greater than incentives for the quarter at the end of 2022. Okay, I'll pass you on to Steven.
Morning. Morning, John. In terms of the costs, a bit more detail there. Labor is generally sort of location specific. In given areas, if, you know, the bricklayers or the ground workers can see reduced workload, we are starting to see prices coming off a little bit there. It's only on those trades, ground workers and bricklayers, which are the early phase of construction, of course. In terms of materials, related to energy prices, I think the, you know, the big manufacturers, steel, they're seeing the, you know, the costs they were expecting for energy hasn't manifested. We need to bear in mind a lot of the steel is forward purchased. You know, we don't deal direct with the steel manufacturers.
We're dealing direct with people and organizations who construct lintels. They're fairly forward purchase for steel. We expect maybe prices to start coming back in our Q4, perhaps. It's early days at this point in time for material price reductions.
Thanks, Steven. Thanks, David.
Thank you.
We will take the last question from Harry Goad from Berenberg.
Hi. Good morning. Thanks for taking my question. We've obviously talked a bit around the end of Help to Buy and the state of the mortgage market. In that regard, how do you think about the concept of you creating shared equity type products, in principle? Thank you.
Harry. Hi. Good morning. Yeah, I think shared equity type products for the house builders are challenging for two reasons. One, because there's been changes in terms of the sort of, I suppose, the regulatory backdrop. A shared equity product provided by a third party needs to be for one, at least one day longer than the primary mortgage. Therefore, primary mortgages are typically being written over 25 or 30 years, and that will be the duration of the shared equity product. Compared to when shared equity was being issued in 2009, we were generally issuing on a 10-year basis. It's quite a different product.
Secondly, we would have to be issuing with a third party because the third party now would have to deal with the process of execution, because our sales teams are not FCA registered. I, I think there's a few challenges around that. I think we're sort of reasonably familiar with what is required, but it certainly wouldn't be the first thing that we'd be reaching for as a, as an incentive.
Very clear. Thank you.
Okay. Thank you very much, Harry. That's it. That's all of the questions that we've had. Thank you very much everyone for dialing in, and we will be back again with the half year results in February. Thank you.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.